Climate Change and the Macroeconomy in the Caribbean Basin: Analysis and Projections to 2099[1]

Background

"In this study, an attempt is made to assess the economic impact of climate change on nine countries in
the Caribbean basin: Aruba, Barbados, Dominican Republic, Guyana, Jamaica, Montserrat,
Netherlands Antilles, Saint Lucia, Trinidad and Tobago.

A methodological approach proposed by Dell et al. (2008) is used in preference to the
traditional Integrated Assessment Models. The evolution of climate variables and of the
macroeconomy of each of the nine countries over the period 1970 to 2006 is analyzed and preliminary
evidence of a relationship between the macroeconomy and climate change is examined.

The preliminary investigation uses correlation, Granger causality and simple regression
methods. The preliminary evidence suggests that there is some relationship but that the direction of
causation between the macroeconomy and the climate variables is indeterminate. The main analysis
involves the use of a panel data (random effects) model which fits the historical data (1971-2007)
very well.

Projections of economic growth from 2008 to 2099 are done on the basis of four climate
scenarios: the International Panel on Climate Change A2, B2, a hybrid A2B2 (the mid-point of A2
and B2), and a ‘baseline’ or ‘Business as Usual’ scenario, which assumes that the growth rate in the
period 2008-2099 is the same as the average growth rate over the period 1971-2007. The best average
growth rate is under the B2 scenario, followed by the hybrid A2B2 and A2 scenarios, in that order.
Although negative growth rates eventually dominate, they are largely positive for a long time.
The projections all display long-run secular decline in growth rates notwithstanding short-run
upward trends, including some very sharp ones, moving eventually from declining positive rates to
negative ones.

The costs associated with the various scenarios are all quite high, rising to as high as a present
value (2007 base year) of US$14 billion in 2099 (constant 1990 prices) for the B2 scenario and
US$21 billion for the BAU scenario. These costs were calculated on the basis of very conservative
estimates of the cost of environmental degradation. Mitigation and adaptation costs are likely to be
quite high though a small fraction of projected total investment costs."